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Thursday, December 29, 2011

Is Free Worth It? A Textbook Story

There are two extreme reactions to "free": with an irrational spurt of enthusiasm, or with "you get what you pay for" suspicion.When it comes to free textbooks, my experience is that suspicion is stronger.

Dan Ariely offers a nice discussion of the irrational attraction of "free" in his book Predictably Irrational. He writes in Chapter 3: "Have you ever grabbed a coupon offering a FREE! package of coffee beans--even though you don't drink coffee and don't even have a machine with which to brew it? What about all those FREE! extra helpings you piled on your plate at a buffet, even though your stomach had already started to ache from all the food you had consumed? And what about the worthless FREE! stuff you've accumulated--the promotional T-shirt from the radio station, the teddy bear that came with the box of Valentine chocolates, the magnetic calendar your insurance agent sends you each year? It's no secret that getting something free feels very good. Zero is not just another price, it turns out. Zero is an emotional hot button--a source of irrational excitement. ... Have you ever stood in line for a very long time (too long), just to get a free cone of Ben and Jerry's ice cream? Or have you bought two of a product that you wouldn't have chosen in the first place, just to get the third one for free?"

For some of Ariely's more detailed research on free, see his article "Zero as a Special Price: The True Value of Free Products," written with Kristina Shampanier and Nina Mazar in the November/December 2007 issue of Marketing Science. Ariely makes an argument that the huge allure of free is that people are afraid of making a bad deal and suffering a loss. "Free" eliminates this fear, which feels almost giddy. Indeed, Ariely finds that if people are offered a $10 gift certificate for free, or a chance to buy a $20 gift certificate for $7, they prefer the free choice. In his interpretation, a free $10 gift certificate has no risk of remorse, but paying $7 for a $20 gift certificate raises a possibility of regretting that $7 expenditure.

This sort of research encouraged me, when I published the first edition of my Principles of Economics textbook a few years back, to offer the book through a company called Textbook Media, which was following a "freemium" business model: that is, offer something on-line for free, and make your money in other ways. In their case, they hoped to make money through on-line advertising, and by selling various supplements for the textbook.

However, this business model didn't work well for my book or any of their other books, and they have now moved to charging for their books--albeit being able to charge much less than mainline publishers. In a post last August, I wrote about Sky-High Textbook Prices--And My Suggested Solution for Intro Economics,
pointing out that a number of intro econ textbooks are selling for $200 and up, while a combination paper and e-version of my textbook sells for $33. (If you're teaching or taking an intro economics course, you can check out the book here.)

Why didn't "free" work out well in the case of this textbook? There are at least four plausible reasons.

1) When it comes to textbooks, all choices are equally "free" to the actual decision-maker, who in this case is the professor rather than the student. If students at the college bookstore could choose among equivalent books by price, the outcome might be rather different. Indeed, professors who are interested can get a few free lunches, a conference or two, and a few hundred dollars for reviewing intro econ textbooks.

2) For a producer, "free" needs to be made up some other way. In the case of textbooks, the prices in the online advertising market plunged when the recession deepened in 2008. Running an on-line advertising business is not the core competency of most textbook publishers. Most professors expect students to pay for the book, and then to have add-ons provided free to them or at low cost.

3) Free raises quality concerns. In the examples of getting a gift certificate, or picking up an extra dessert at the buffet line, quality concerns are diminished. But when something where low quality might cause us trouble or concern over a period of months, like a textbook, then the risk that "free" signals low quality is a real concern. Some feedback from professors was that students took a "free" book less seriously, because they hadn't paid for it.

4) It turns out that a number of students have a personal financial incentive to prefer expensive textbooks. When they purchase a new $200 book, the cost is covered by someone else--perhaps a college bookstore account funded by financial aid or college loans or parental tuition payments. However, when that student re-sells a $200 book for $120 in the used book market after the class is over, that $120 is cash in the student's pocket. A book that sells new for $33 will sell for even less in the second-hand market.

I do still wonder if a business model of educational content that is free to college students can succeed. I dno't think it will be done by a big legacy publisher: they have too much overhead wrapped up in a conventional publishing model. But for example, perhaps a company like Google, with advertising and an array of related products, could partner with a consortium of colleges to explore the possibility of offering lots of educational content freely on-line as a way of attracting customers for its advertising content.The consortium of colleges would provide some assurance of quality, and perhaps also a ready-made market for the materials. The search engine company could customize advertising to the students in ways that would bring in the most revenue. The educational materials would also attract pageviews for other purposes, and perhaps even attract young adults who could become relatively "sticky" users of that search engine and its other related products for a time into the future.